This Dividend Stock Looks Interesting
Imagine being a passive income investor who collects quarterly dividends from a company and then all of a sudden gets a check that’s 10 times bigger than the last one.
Sounds too good to be true, right?
Well, that’s what has happened to shareholders of Sunstone Hotel Investors Inc (NYSE:SHO). In the first nine months of 2019, Sunstone declared three quarterly dividends of $0.05 per share.
Then, on December 10, the company’s board of directors declared a cash dividend of $0.57 per share of common stock for the fourth quarter. (Source: “Sunstone Hotel Investors Declares Fourth Quarter Dividend On Common Stock,” Sunstone Hotel Investors Inc, December 10, 2019.)
That dividend is payable on January 15 to shareholders of record as of December 31, 2019.
That means SHO stock’s January 2020 dividend is more than 10 times each of the three preceding quarterly dividends. And no, the company did not make a typo.
Better yet, on December 20, the company announced a revised quarterly dividend of $0.59 per share of common stock, $0.02 higher than the previously declared amount. Sunstone said the revision was due to “updated expectations for Company operations and recently announced changes in proposed tax regulations.” (Source: “Sunstone Hotel Investors Declares Revised Fourth Quarter Dividend on Common Stock,” Sunstone Hotel Investors Inc, December 20, 2019.)
Add it up and you’ll see that, in full-year 2019, Sunstone declared total dividends of $0.74 per share.
Based on the company’s share price at the time of this writing, Sunstone has an annual dividend yield of 17%.
Sunstone Hotel Investors Inc Is a Safe Dividend Stock
Other than for offering a more-than-decent yield, Sunstone Hotel Investors stock deserves investor attention for its dividend safety.
Sunstone Hotel Investors Inc is a real estate investment trust (REIT) headquartered in Irvine, California. As its name suggests, the company specializes in real estate investing in the hospitality industry. Right now, Sunstone’s portfolio consists of interests in 20 hotels, totaling 10,609 rooms. (Source: “Overview,” Sunstone Hotel Investors Inc, last accessed January 2, 2020.)
Most of these hotels are operated under well-known upscale brands such as “Hilton,” “Hyatt,” and “Marriott.”
Like most REITs, Sunstone Hotel Investors Inc reports something called funds from operations (FFO). In order for a REIT’s dividend to be considered safe in a given reporting period, it should generate FFO that exceed its payout for that period.
Sunstone reported financial results for the third quarter of 2019 on November 4. The report showed, that during the quarter, the company’s adjusted FFO came in at $0.29 per share. The amount easily covered the $0.05-per-share dividend that management declared in the quarter. (Source: “Sunstone Hotel Investors Reports Results for Third Quarter 2019,” Sunstone Hotel Investors Inc, November 4, 2019.)
Of course, the bulk of SHO stock’s dividend for 2019 was declared in the fourth quarter. But here’s the thing: in the first nine months of the year, Sunstone Hotel Investors Inc generated adjusted FFO of $0.86 per share. Its dividends for full-year 2019, as mentioned earlier, added up to $0.72 per share.
So in the first nine months, the company already generated more than enough funds to cover its payout for the entire year.
And while the Sunstone’s fourth-quarter results are yet to be available, management has issued their guidance. For full-year 2019, they expect the REIT to earn $1.07 to $1.13 per share in adjusted FFO.
Therefore, if the company meets the midpoint of its guidance range and generates adjusted FFO of $1.10 per share for the year, its total declared dividends of $0.72 per share will result in a payout ratio of 65%.
As a rule of thumb, I like to see REITs that pay out less than 90% of their adjusted FFO so they will have a margin of safety. In the case of Sunstone Hotel Investors stock, the payout ratio is well within my comfort zone.
Striving to Stay Relevant Long-Term
If you’ve been following the hospitality industry, you’d know that, in recent years, not every hotel is doing that great.
The good news is, Sunstone is not standing still. The company has been upgrading its portfolio by selling general commodity hotels and acquiring “Long-Term Relevant Real Estate” (LTRR) hotels. (Source: “Sunstone Hotel investors Company Presentation November 2019,” Sunstone Hotel Investors Inc, last accessed January 2, 2020.)
Sunstone has sold 19 of the 30 hotels it owned at the end of 2010. The hotels that were sold had an average revenue per available room (RevPAR) of $83.00 and earnings before interest, tax, depreciation, and amortization (EBITDA) per key of less than $10,000 in 2010.
Meanwhile, the company has bought nine hotels since 2010. These newly acquired properties achieved an average RevPAR of $217.00 and EBITDA per key of more than $36,000 in 2018.
In other words, the LTRR strategy has worked.
At the end of the day, there are companies with more exciting businesses than this hotel REIT. But for investors looking for reliable dividends, SHO stock deserves a look.